Agentic commerce threatens Amazon's e-commerce position by bypassing the ad-driven model that currently generates over 100% of its retail operating profit.

Amazon is facing the biggest threat in 30 years to the company's dominant position in e-commerce. Company won in e-commerce by being the aggregator of demand. It wasn't the lowest cost place to shop, but it was a place that all customers went and so suppliers had to follow.

The simple way to think about this is Amazon was the app we chose to shop on over and over again. Hundreds of millions of customers getting locked in by their Prime accounts.

But now the Agentic Commerce is here. That could destroy that position. Over the weekend, Amazon banned Meta's Muse from scraping its app and doing shopping on Amazon.

Amazon's actually been the most hostile to Agentic Commerce. Why is that? Because Amazon doesn't make a profit on the items you buy or warehousing those profits or shipping them.

It makes its money on advertising. More than 100% of the company's e-commerce profit comes from advertising. And bots don't watch ads.

Today, I'm going to explain why this is the biggest threat in 30 years to Amazon's position in e-commerce and why the company may not have any good answers to the threat. This is what disruption is all about.

And in this case, Amazon is the company being disrupted.

Priced earnings multiple about 20. That looks pretty cheap, but look at this price earnings multiple on a forward basis. It's about 28.

I'll explain how they've had some short-term profits over the past couple of years.

And the thing I'm going to dig into using fiscal AI is their key performance indicators. This tells you what drives a business and it's going to give you insights into how a company really want runs.

This is really key to understanding Amazon today.

All right, let's dig into the numbers at Amazon. And I just wanted to start with some of the highle numbers. In yellow, what you see is revenue. So consistent growth from Amazon. Nothing to be surprised about there.

But the other two numbers, it's important to understand what drives operating profit. And then in purple is net income. So net income is extremely high. I mentioned that low price to earnings multiple just a second ago.

That's well above their operating income. The reason for that is this huge jump in nonoperating income. Essentially, this is the stakes in some of the companies that Amazon has invested in the past.

In particular, Anthropic is going to be the big name here. So it's a non-cash gain, but they have to put it on the income statement and the balance sheet. That's why you see such a big dist distinction between net income and operating profit.

Okay, so I'm going to use operating profit here because that's a better indicator of the economics of the underlying business. There also three major drivers, three ways that they report their operating income.

That's with North American operations, international operations. Those are going to be the two retail operations and then AWS. So AWS is, you can see now over 50% of operating income.

I'm not going to be discussing that today. So we're going to take this out right here. The big thing that you're going to want to look at with their retail business, which is my focus today, is what the operating profit is in North America, $33.7 billion, and internationally, $5.4 billion.

So, why is this recent change in aentic shopping so important? Why is the fact that Muse is extremely popular and is very easy to buy things using Muse so important for a company like Amazon?

Well, their entire business is predicated on you going to the Amazon app and then searching for the things that you want. That's aggregating demand. And then they're going to make it very easy for suppliers to put their goods on Amazon.

They're going to warehouse them. They'll ship them for you. Take all those pain points away. And that's how they get a very sticky business both from a user side and from a supplier side.

But there's a couple of things that I want to highlight here, especially over the past decade. So you can see a decade ago, the retail business was essentially not profitable. Not very profitable at all.

If you add in the international business, it was actually negative operating margin, but still relatively low operating margin going into 2020, 2021, 2022. And then you see a big jump in operating income over the past four or 5 years.

This is notable because this is operating leverage kicking in for Amazon.

But if you look at all of their revenue sources, look at since 2021, the company has grown. It's grown a little bit over 50%. This is all the non AWS revenue sources. So, it's grown a little over 50% over that period of time, but the operating profit is well exceeding the growth that we've seen in revenue.

So, what happened here is what happened operationally. You've probably seen this if you use Amazon. I just searched for jeans. And what you notice here is this is a Wrangler ad.

Sponsored. You can see that right here. These first results, sponsored, sponsored, sponsored, sponsored. Everything that you see on this first page, except for this item right here, it looks like, is actually an advertisement.

So now if we go back to results, look at the one revenue item that looks like that is growing significantly faster than the others. That is advertising service revenue. $12.6 billion in revenue in 2019 over the past year.

That's $76.1 billion. That isn't just 100% of the company's operating income for the retail business. It's almost 200%.

Now, this isn't going to be quite a 100% margin, but figure it's 70, 80, 90% margin. If you take away all of these advertisements that are on Amazon's platform, they are not a profitable retail business.

So, now think about what's going on in Aenta Commerce. If you're shopping with Muse and you're saying, "Hey, what's the best pair of jeans for me to buy? Look at all the purchases that I've made in the past.

This is my favorite brand." Maybe you give a little bit of information about what you're looking for. If it's now going on Amazon and it's not looking at ads, that is a money losing proposition for Amazon.

This is why Amazon has blocked Muse from going onto the site and shopping agentically. This is a fundamental problem for Amazon and the reason is Amazon is being disintermediated.

The entire value proposition for the company for investors is that this was the aggregator of demand. People were choosing to go to Amazon to do their shopping. If they're not choosing to go to Amazon to do their shopping and they're just using Muse or other some other sort of agent to do their shopping digitally, that means that the actual location, the website that they're going doesn't have nearly as much value.

They're going to look at Amazon. They're going to look at a Shopify shop. They're going to go directly to the retailer. Whoever is going to give them the best price, the best time for shipping, whatever the customer is looking for, that's what that agent is going to be purchasing.

That is a fundamental shift in the way that we've shopped in the past. It takes the power away from Amazon.

And the number that is really critical is the advertising revenue that Amazon generates from every purchase. It's happened over the course of years, but they have stuck advertising almost everywhere on the Amazon site.

And that is what has driven the company's increased profitability. It's not that they're getting more efficient with scale. It's that they've increased their take rate from their suppliers by increasing advertising that's on the platform.

This is a constant challenge for the suppliers on Amazon because this takes margin away from them, but it's the way that Amazon makes money.

The reason that agents are such a big threat to Amazon is because agents don't watch ads. This is a fundamentally different business model and Amazon as it currently is constructed today is not built for this, especially in the retail space.

So, this is going to be something for investors to watch. I think all of these big companies are eventually going to figure out how this works. But if Amazon goes from being in a power position because they are the aggregator of demand to being more of a commodity supplier and now maybe it's better to build your shop on with Shopify and use the agentic tools that they have.

Actually lean into the fact that Muse is maybe doing a lot of shopping or other agents are doing a lot of shopping. You don't have to pay that Amazon tax. That's what the business was built on is Amazon being the place that customers went to make their purchases.

If that's not how we're going to be shopping in the future, huge threat to the business.